Nailing down the numbers on impacts of oil and gas subsidy reform

News Article Sponsored by CCI Pipeline Systems

As pressure mounts globally for countries to end fossil fuel subsidies, a reliable assessment of the potential impacts on investment and industry finances will be crucial to guide policy.

Many U.S. taxpayers would probably be surprised to learn they subsidize oil and gas production by at least 4 billion USD each year. Indeed, given federal budget concerns, not to mention the urgency of climate change, President Obama tried to cut back subsidies during his first term. Working with Democrats and some Republicans in Congress, he tried several times to repeal the industry’s three biggest tax breaks: the expensing of intangible drilling costs, percentage depletion, and the manufacturing deduction. Congressional proposals in 2011 and 2012 drew a majority of Senators’ support, but came only votes shy of reaching a filibuster-proof 60 votes.

Now, as pressure mounts globally for countries to end fossil fuel subsidies, a study from the Council on Foreign Relations adds fresh insights that could help reinvigorate the debate.

Authored by Tufts University economist Gilbert Metcalf, it finds that repeal of these three tax preferences would reduce U.S. oil and gas production by less than 5%, and global oil demand by about 0.5% – impacts he considers relatively small. Like other researchers before him, Metcalf argues for repeal on the basis that it offers a fiscal benefit without significant or “material” repercussions.

In contrast, research sponsored by the industry has found the effects of subsidy reform on U.S. oil production to be much higher,on the order of 15%. But unlike industry studies, the Metcalf analysis uses transparent methods and assumptions, which inspires greater confidence and enables more rational, fact-based debate.